Navigating Estate and Inheritance Taxes

States with Estate and Inheritance Taxes

Estate and inheritance taxes can significantly impact wealth transfer, and only a few states impose these taxes. Here's a detailed breakdown:

Estate Taxes

These taxes are based on the value of the decedent's estate before distribution to heirs:

• Connecticut: 11.6% - 12% (applies to estates over $9.1 million in 2024)
• Hawaii: 10% - 20% (exemption limit: $5.49 million)
• Maine: 8% - 12% (exemption: $6.41 million)
• Massachusetts: 0.8% - 16% (exemption: $1 million)
• Minnesota: 13% - 16% (exemption: $3 million)
• New York: 3.06% - 16% (exemption: $6.58 million)
• Oregon: 10% - 16% (exemption: $1 million)
• Rhode Island: 0.8% - 16% (exemption: $1.73 million)
• Vermont: 16% (exemption: $5 million)
• Washington: 10% - 20% (exemption: $2.193 million)

Inheritance Taxes

These taxes are based on the value of assets received by the beneficiaries:

• Iowa: Phasing out by 2025
• Kentucky: Varies by beneficiary class (exempt for immediate family)
• Maryland: 10% (estate exemption applies; immediate family exempt)
• Nebraska: 1% - 18% (depending on the relation to the decedent)
• New Jersey: 11% - 16% (exempt for immediate family)
• Pennsylvania: 4.5% - 15% (spouses exempt)

Maryland is the only state with both estate and inheritance taxes​

The Case for Life Insurance in Estate Planning

Problem: Estate and inheritance taxes can create a liquidity crunch, forcing heirs to sell assets or borrow funds to pay the tax bill.

Solution: Life insurance can provide immediate liquidity upon the insured's death, mitigating this issue. Here’s how:

1. Covering Tax Liabilities: The proceeds from a life insurance policy are generally income-tax-free and can be used to pay estate or inheritance taxes.
2. Preserving Assets: Life insurance ensures that family businesses, homes, or investments aren't sold under pressure.
3. Irrevocable Life Insurance Trusts (ILITs): Placing a policy in an ILIT keeps the proceeds out of the taxable estate while directing funds to cover taxes and provide for beneficiaries.

By integrating life insurance into estate planning, financial planners can help families secure their legacies while minimizing tax burdens. This is especially valuable in states with lower exemption limits like Massachusetts or states with double taxation like Maryland.